An increasing number of employers are doing business internationally which usually involves employees working in a foreign country for a while or overseas employees coming to work in the UK.

As if UK employment tax laws are not complicated enough, it is a completely different ball game for employers in getting their tax reporting or withholding obligations right when staff are moving about internationally, not just here in the UK, but also in the overseas countries their employees are sent to.

In many cases, early advice is absolutely crucial to ensure the employer remains within tax laws and so this article is intended purely as a heads-up on some of the key problem areas employers operating internationally need to be aware of , with a particular emphasis on the UK side of things. Be aware though that there are many more issues we have not covered here, this is just a flavour !

Reliance on "The 6 Month Rule"

It is commonly believed that employers do not have any extra tax or social security obligations to deal with, provided that the employee is not working in a different country for more than 6 months, irrespective of whether this is a UK employee going overseas or a foreign worker coming to work in the UK.

It is true that this sometimes CAN be the case in certain circumstances, depending on the country involved and what tax agreements exist between the UK and other country. BUT, such an approach to managing the tax aspects of international staff movements is certainly NOT recommended as there is a multitude of different rules for different situations and relying on such a broad brush approach can often lead to costly mistakes being made.

Short Term Business Visitors to the UK

It is not very well know that, strictly speaking, PAYE must be operated from day one for employees coming to the UK to work for a UK based branch or office of an overseas business or for any employee or director working under the day to day control and management of a UK based business or branch or office of an overseas business. This is the case even if the employee will not be in the UK for very long and even if UK tax is ultimately not payable by the employee (e.g. because they are non resident for tax purposes).

However, there is an upfront agreement (often called an Appendix 4 Agreement) that can be obtained from HMRC that allows an employer to dispense with the normal rules provided certain conditions are met, namely:

The employee is resident in a country with a Double Tax Agreement with the UK which will cover the UK earnings

The employee is coming to work for a UK company or a UK branch/office of an overseas company

The overseas entity will, ultimately, pay the salary and related costs for the employee whilst in the UK either directly or via a recharge

An Appendix 4 Agreement works in a similar way to a P11D Dispensation in that it needs to be agreed upfront with HMRC, i.e. before the employee(s) come to the UK, for it to be effective. Failure to do so in advance could render the employer liable to penalties and additional taxes for failing to comply with the PAYE regulations.

The information to be supplied to HMRC to obtain an Appendix 4 Agreement even differs depending on whether the employee is going to be in the UK for less than or more than 60 days or more than 90 days which adds another layer of complexity for the employer to comply with.

The employer also has the option of simply applying for an NT (No Tax) code instead of an Appendix 4 Agreement for Short Term Business Visitors which again must be applied for in advance. Whilst this may be simpler if very few employees come to the UK, an Appendix 4 Agreement comes into its own if this is a more regular thing involving more employees.

Obviously this is from the UK side but it could well be that some overseas countries may also have similar "day one" charging provisions so it is crucial to check in advance.

Responsibility for UK PAYE and NI deductions

Some employers use the excuse that the worker is "not our employee" if PAYE errors are identified on UK earnings.

However, this is irrelevant and unlikely to be helpful as it is the business in the UK for whom the employee is working for that is required to operate PAYE and file all related reports, e.g. forms P11D, in the normal way regardless of who is actually paying the employee. In other words, it is the UK business that is classed as the deemed employer under PAYE rules regardless of whether they are in reality so denying responsibility just doesn't wash.

Tax/NI Treaties and Agreements and the geographical influence

As we mentioned above, whilst the rules in dealing with employees going to/ coming from certain countries can be similar if even the same in some cases, it is important to establish some key facts regarding the specific country in starting to consider the possible tax and NI issues both in the UK and the other country, e.g.

Is the other country within the European Economic Area ?

Does the UK have a Double Tax Treaty with the other country ?

Does the UK have a full Reciprocal Agreement with this country covering both NI and social security benefits ?

If no Reciprocal Agreement exists is there a Double Contributions Convention in place for NI only ?

Is any other agreement in place which stipulates the rules between the two countries ?

Establishing the above should provide a good steer as to what the employer needs to report and deduct in the UK and the other country to comply with all employment tax and NI laws and obligations.

National Insurance certificatesand time limits

It is all too easy to get the NI position wrong in relation to inpat or expat employees, particularly when the rules change after a certain period, e.g. as in the case of some employees coming to the UK who are exempt for the first 52 weeks, or where a certificate is required to validate the specific treatment for NI purposes, e.g. in the case of workers coming from EEC countries.

Proper procedures need to be in place to monitor the expiry of certificates and to identify when special rules lapse to avoid issues arising. Often we see clients overpaying NI (which can sometimes be recovered from HMRC) rather than underpaying but it is far better to get the NI right first time around.

Inadequate Internal Procedures

Even if an employer is up to speed with the tax regulations behind international staff movements, or have tax advisors who are, compliance can still be a huge problem if there are big gaps in the internal admin in relation to the inpat/expat employee population.

Disappointingly, this is the biggest issue we come across with clients in this area not, as would be expected, with complex tax legislation.

We list below some of the common issues with internal admin and the consequences that can arise.

Issue

Resulting Problem

Lack of formal policies covering international staff movements

Not understanding tax and NI treatment of cash payments, expenses and benefits in kind

Not taking advantage of tax planning initiatives

Not reporting complete and accurate information to the tax authorities

Inadequate internal tracking procedures on where staff are

Non compliance of PAYE and NI regulations, particularly in the UK

Assignments may be continued without proper consideration of individual's tax residence position or beneficial tax treatment

Lack of data around cash payments and benefits to relevant employees e.g. from overseas entities

UK reportable payments may be missed

Overseas reportable payments may be missed

Tax and NI deductions may be incorrect in one or both countries

Reportable events on share schemes may be missed

Other Taxes

We are only covering the tip of the iceberg here with PAYE and NI issues but, of course, there are other taxes to consider whenever business is being done across international borders.

One of the biggest potential issues is often whether a Permanent Establishment is being created in the new territory for Corporation Tax Purposes, i.e. a place of business is established that would trigger, at the very least, business tax issues in that country.

VAT is another issue that cannot be ignored. As many of you will agree, VAT is complicated at the best of times in the UK and it can be even more of a minefield when selling goods and services in other countries.

What we are saying here is, yes absolutely get the PAYE side right but don't forget about other tax issues that may arise because of your employee leaving or coming to the UK for your business purposes.

Conclusion

Dealing with tax issues when staff move about internationally is definitely not for the faint hearted. But that doesn't mean to say that it can be ignored because it can't ! We have seen many employers agreeing to huge settlements of back tax and NI with HMRC becauuse they have failed to address some of the areas we have highlighted above.

This is definitely one area where DIY'ing on the PAYE and NI side of things is not recommended - for obvious reasons. Do yourself and your business a favour - get some "proper" advice from advisors who know what they are doing.

On that note, we should clarify our own expertise. We make absolutely no secret of the fact that Optimum PAYE is, and always will be, UK employment tax specialists. HOWEVER, there is a very strong link and lots of crossover with inpat/expat tax issues in what we do and this is why we do offer specialist employment tax advice on international staff movements to clients by Associates who are experts in this field.

Any doubts/questions/concerns around any of the above, you know where we are.